Is Ford's Profit Streak in Trouble?

Weak U.S. sales threaten to undermine the Blue Oval’s big comeback.

Mar 1, 2014 at 8:01AM

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Big sales of Ford's F-150 pickups helped drive strong profits in 2013. But slowing sales could mean big discounts will be necessary in 2014. Photo credit: Ford Motor Co. 

Here's a great statistic: Ford (NYSE:F) has now been profitable for 18 consecutive quarters. 

It has been an impressive comeback for the iconic automaker, which lost billions last decade as it scrambled to pull off a long-overdue restructuring.

But now, slumping auto sales are raising concerns about the Blue Oval. Is Ford's profit streak at risk?

As U.S. auto sales go, so go Ford's profits -- at least right now
Let's be clear about this up front: The short answer is almost certainly no. Unless we see another deep recession, Ford is likely to remain profitable for the foreseeable future. The company is on a much, much healthier financial footing than it has been in a long time. There's no deep danger here.

But the sales slump we've seen in the U.S. recently could put a big dent in Ford's profits if it persists. That won't do any good for Ford's share price.

Consider these two numbers: Ford's overall profit before taxes in 2013 was $8.6 billion. Ford's overall profit before taxes in just its North American regional business unit in 2013 was $8.78 billion. 

Yes, that's right. Ford's profits in North America were greater than its overall profits last year.

Ford is losing money in a tough market as it restructures in Europe, it's roughly breaking even as it struggles with currency woes in South America, and it's making massive investments for growth in Asia. All of those added up to a small net loss last year.

Meanwhile, it's making great profits here at home, thanks to a strong product line and a recovering U.S. economy. But here's what I want you to understand: Those profits in North America have been carrying the company. They've been giving Ford the breathing room it needs to get its overseas operations fixed up. (And that's OK: Ford is making good progress overseas.) 

In another two or three years, profits from Europe and Asia should make handsome additions to Ford's bottom line. But we're not there yet.

And that means that the possibility of a sales slump in the U.S. has to worry Ford shareholders.

If this decline is just due to bad weather, it'll pass soon
Ford's U.S. sales were down 7% last month, a decline that Ford blamed on rough winter weather in many parts of the U.S. The forecasters at Edmunds.com estimate that Ford sales fell another 5% in February. (Ford will release its official figures for February on Monday.) 

A small decline in sales isn't necessarily cause to worry about Ford's profits. But when other automakers are seeing similar declines, and when inventories of unsold vehicles are rising rapidly, that's cause for concern.

Why? Because it could lead Ford's rivals to cut prices. In fact, it already has: General Motors (NYSE:GM) boosted its discounts in February, and Automotive News has reported that GM is planning an even bigger sale on most Chevrolets, including its pickups, in March. Meanwhile, Chrysler is offering big incentives on several models, and Nissan (NASDAQOTH:NSANY) has been very aggressive on pricing since last spring. 

Not coincidentally, Edmunds thinks that Chrysler and Nissan are the only two major automakers to see significant year-over-year sales gains in February.

Of course, i's possible that this sales slump is due to nothing more than the rough winter weather, in which case Ford is likely to make up much of the lost sales volume over the next few months. 

I talked to Edmunds senior analyst Jessica Caldwell on Friday, and she thinks that's likely. She told me that her team tracks U.S. sales on a week-by-week basis, and they have seen much stronger sales in weeks when the weather was relatively mild. That suggests that the strong demand we've seen for most of the last couple of years should resume once spring arrives, she said.

It's not a sure thing, though. Caldwell said that March results will be telling. March is typically one of the year's strongest months for new-vehicle sales, and the rough winter weather should have largely abated in most of the U.S. by the end of next month. 

But there's a chance that the problems run deeper
But what if the U.S. auto sales slump continues into spring?

If other automakers follow GM's lead and crank up their incentives -- and some are likely to, at least in the near term -- then Ford will come under pressure to offer bigger discounts of its own.

That will undercut Ford's carefully crafted profit strategy. One key principle that has driven Ford's comeback is this: By offering top-notch products, it can command premium pricing.

That has worked out very well so far. Ford's profit margins in North America have been among the highest in the business. But if market conditions force Ford to put those products on sale, those margins will be hurt.

And as we've seen, anything that dents Ford's profits in North America could have a big impact on its overall bottom line. Stay tuned.

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John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends and owns shares of Ford. It also recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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